February 12, 2002

Q: You asked Alan Greenspan at a recent hearing what economic value do you see in the way Enron used these and I'm told Greenspan answered none.

I think that's what ultimately is going to be the crux of the legal case against Enron. I don't know about all 4,000 of them but, of the ones that are very public, this is people moving around assets and income on a non-economic basis to generate a higher sense of valuation in their company.

Q: But couldn't you ask that same question of not all but an awful lot of these devices in the business and finance world?

Naw. Objectively or statistically, I can't tell you whether more of them are eye-wash than not. I saw a lot of them that were used for good purposes when I was an investment banker. I even signed off on SPEs to provide risk support for derivative portfolios and other things I worked on actively myself a couple of times.

Q: In Enron's case, they were using offshore banking havens. Can't you ask the same question about of that? What's the economic value of allowing both U.S. finance and corporations to use these places that allow tax avoidance and maybe cooking the books sometimes and evading U.S. securities laws?

All of those are fair questions. All of those should be asked by internal auditors in the first instance, all of them should be understood by the boards of directors and all of them should be challenged by the outside auditors. Now, if you're cooking the books, that is not an appropriate purpose.

Q: But leave aside the game-playing and the fraud. What's the economic value for the country to authorize that use of offshore havens?

Well, for instance, I'll give you one that's a reasonably sound economic value. We have insurance regulations in 50 states and very tightly drawn, very different regulations. So the reinsurance industry is located in Bermuda and it gets away from regulatory structure that would allow for people to actually put real money at risk. So the industry is organized there and it's done for an economic benefit for the reinsurers, but also so you can get away from some of the onerous restrictions that people would have to write certain amounts of insurance coverage.

Q: What about in the financial system?

Well, you know, there are similar situations in regard to derivative books which in some instances are shaped not unlike insurance books. So there are purposes that are perfectly legitimate. They may also be done so that you look at "haircut" rules [on taxes or interest rates] or something that private enterprise might think are heavy-handed, so you organize in an environment so you can get maximum use of your capital. It's a fine line when it goes to saying, I'm just doing this 100 percent to avoid taxes, there's no other economic reason to be there other than for tax avoidance.

Q: As you know, you got zinged or Goldman Sachs got zinged by the Wall Street Journal for the "monthly income preferred shares" (MIPS) you invented for Enron in the early nineties. And their version is that this allowed Enron to describe the security for the tax collector as a debt and therefore take a tax deduction on the interest payments while, for shareholders, they represented it as equity that shows how strong the company is.

In that particular case, there's no question the financial engineering did what you just said it did. But it was also reviewed by the rating agencies, it had to be graded when it was in the subsidiary whether it was economically sound. It had to be continually reported to maintain its rating. We first of all got a legal opinion by a respected lawyer. Then it actually got litigated in the Tax Court because the Treasury didn't like it and it was approved. I'm not saying--it was flushed out in a way that we didn't think we were, ah. We knew we were being aggressive but we were being aggressive to try to raise capital to try to build a busines and it was all fully disclosed. And if the Treasury hadn't said stop doing this, we would have not done more than--

Q: I don't want to start an argument over this but, according to this account, not just Goldman but the whole bond industry tuned up the engine for lobbying and so forth was all over Washington, including letters signed by you, saying get the Treasury off our backs here.

I'm sure we lobbied to make certain people were knowing what our case was with regard to MIPS. You know, we probably would have preferred not to go to a court to have them sort it out and thought the case was secure.

Q: But Treasury finally folded on it?

They folded, but then it was taken to court and was actually approved in a Tax Court.

Q: My question again though, without pretending to any full understanding of the details, is: what's the economic value in allowing you to invent that offshore transaction for Enron? If they can't raise capital in U.S. capital markets----

They could have. The cost of capital would be a lot higher. To use and then your ability to use equity for various purposes of additional leverage like the covenants on loan agreements is different than having debt arrangmements so --

Q: Isn't that another way of saying, we want to use these havens because we're outside the U.S. securities laws?

Ah...These got fully consolidated back as registered SEC transactions. It's all out there in the prospectus. It was sold to sophisticated investors and it was really a desire to raise equity capital, i.e. preferred, as opposed to going in and having a diluting shareholder issuance of new stocks.

Q: And these were 50-year securities. Fifty years is a long time for Enron.

Well, it's not going to be a great investment for those who bought on that basis. But, you know, for a lot of other companies, it was a good, it was advantageous for them in terms of creating equity with a tax deduction. You know, this is no different, in my view, than the argument that people have made that [stock] options shouldn't be expensed at their value at the time of their issurance. You write them off for income tax purposes, but you don't take any costs. This is kissing cousins with that kind of concept. .

You know, by the way, I'm not sure as a senator now who is interested in absolutely making sure, particularly in the current environment, that we have transparency and openness, that I would be as supportive today--given that we have created a world where people are skeptical of why people are doing this.

Q: That's exactly what I'm driving at. If people like yourself who understand this world would step back and take a look across the whole field and say, okay, that one's real economic value and that one isn't. Yeah, they all help somebody or other but they don't necessarily help the country. Among other reasons, a lot of taxes are avoided. Would you entertain such a review and what do you think you would come out with?

Yeah. Sure. In the same way that I'm making the case in regard to 401ks--that we ought to put some kind of limitations on the concentration of investments in the company stock for employees. Because we're spending--these are the President's numbers--$330 billion over five years in tax subsidies to promote 401k investment. I don't think we ought to be doing that in a non-sensible manner relative to what the best thought in financial practices are which is diversification. So a cap is not out of the context of sensible public policy. It isn't when it comes to loan limits for banks. It isn't for concentration of assets in security firms. It isn't even for defined-benefit programs run by sophisticated money managers. So why are we giving just unbelievable leeway for an investor group that probably has even less information than a lot of sophisticated investors?

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